Environmental and social levies

Transcription

1 Centre for Sustainable Energy Environmental and social levies Past, present and future Ian Preston, Centre for Sustainable Energy Darryl Croft, Association for the Conservation of Energy October 2012 Funded by Consumer Focus 3 St Peter s Court Bedminster Parade Bristol BS3 4AQ info@cse.org.uk reg charity We are a national charity that shares our knowledge and experience to help people change the way they think and act on energy.

2 Contents Executive summary Introduction Scope of this paper Environmental and social levies, energy and housing policy Approach to estimating the cost of social levies covered Historic trends for fuel prices The cost of environmental and social levies Conclusions Annex I: The domestic FIT Annex II: Additional tables Centre for Sustainable Energy and the Association for Conservation of Energy 1

3 Executive summary The principle of recovering the costs associated with UK environmental and social policies via consumer energy bills or taxes is not a new one. This paper seeks to quantify the historical costs and average cost per household associated with such policies from 1990 to 2010, and future forecast costs from 2010 to The input policy costs and fuel price assumptions used in the analysis are taken from a parallel study by the Association for Conservation of Energy (ACE) and the Centre for Sustainable Energy (CSE) for Consumer Focus. 1 In light of the recent controversy around the Government s proposal to reduce the support for small scale renewable electricity (Feed in Tariff (FIT) rate for photovoltaics (PV)), this paper also explores the cost implications of two different tariff scenarios investigated by Government 2. The range and total costs of policies aimed at delivering specific objectives within the UK energy sector have increased significantly over the years. In 1990, just one policy the Non Fossil Fuel Obligation (NFFO) imposed a cost of around 52 per year on the average household energy bill. This cost on energy bills remained relatively constant between 1990 and However, in 2001 the cost of supporting nuclear power and decommissioning was moved to the public finances, to be recovered via taxation. Consequently, the amount contributed to policies via energy bills fell to an all time low of 1 per year (for the Energy Efficiency Standards of Performance (EESOP)). 3 Since 2001, the cost on bills has risen steadily to 68 on average in 2010, a cost attributable mainly to domestic energy efficiency (the Carbon Emissions Reduction Target (CERT)) 29 per cent, renewables policy (the Renewables Obligation) 28 per cent and carbon pricing (the EU Emissions Trading System (EU ETS)) 32 per cent. The highest policy cost to householders between 2001 and 2010 can be attributed to nuclear power (with the exception of 2004 and 2008 when the costs of decommissioning were lower than the typical value). The costs of supporting nuclear power reached a peak in 2007, at 96 per household (the majority of the funding at this time was focussed on decommissioning). This equates to a total cost of 2.48 billion (the householders contribution to the cost of nuclear power through taxation has been limited to the share of National Insurance and income taxation from total receipts). These costs have now fallen and are expected to stabilise at approximately 0.41 billion per year going forward. 4 Looking to the future, in 2020, the suite of bill funded policies, including the Energy Company Obligation (ECO), Warm Homes Discount, Renewables Obligation, EU ETS, Carbon Price Floor, Electricity Market Reform (EMR) and Smart Meters, are expected to cost some 4.6 billion. This is an average cost to domestic consumers of around 130 a year (representing 11 per cent of the average dual fuel bill in 2020). Over the period from 1990 to 2020, the cost to households of supporting nuclear power falls sharply, from around 86 per household in 2010 to an expected 14 in 2020 (which represents funds from taxpayers rather than FIT Contracts for Difference). The average annual cost of the Renewables Obligation rises from 19 in 2010 to an expected 37 in 2020 for a standard electricity customer i.e. one that does not use electricity for heating. The EU ETS sees a similar scale of increase, from around 22 to 1 Impact of consumer bills of energy policy. A report to Consumer Focus, by ACE and CSE, Option A and a do nothing scenario from the Department for Energy and Climate Change (DECC) impact assessments. 3 As an average across all gas and electricity customers 4 Based on the average investment required in the timeframe identified by the Office of Budgetary Responsibility (OBR). The basis for the OBR data is the Whole of Government Accounts (WGA) for the year ended 31 March 2010, as published in November 2011 Centre for Sustainable Energy and the Association for Conservation of Energy 2

4 27. The cost of supporting energy efficiency measures via CERT, and latterly the ECO and Green Deal, remains relatively constant at an average of around 29 per household. The cumulative cost to taxpayers and energy customers of delivering a low carbon energy policy in the UK from 1990 to 2010, and projected costs from 2011 to 2020, are illustrated in Figure 1. Total cumulative cost in billion of environmental and social levies to taxpayers and domestic energy customers from 1990 to 2010 and Figure 2. Projected total cumulative cost in billion of environmental and social levies to taxpayers and domestic energy customers from 2011 to 2020 (under DECC s Option A scenario for FIT). By 2020 (from 1990), nuclear power will have received funds of around 30 billion from both domestic energy customers and taxpayers, based on the household contribution described in section 6.2. Supplier led investment in energy efficiency makes up the next highest proportion, with a cumulative cost of 17.8 billion followed by the Renewables Obligation at 13 billion. It is important to note that the supplier led energy efficiency programmes will provide customers with a long term benefit through reductions in their energy bills associated with efficiency improvements. The cost of the FIT shown in Figure 1. Total cumulative cost in billion of environmental and social levies to taxpayers and domestic energy customers from 1990 to 2010 (and the total policy costs in 2020 quoted previously) reflects the Government s Option A scenario for reducing the rate of the PV tariff. If the tariff remains at the original (higher) rate (the do nothing scenario), the cumulative cost to 2020 of the FIT to domestic consumers rises from 1.4 billion to 8.8 billion (see Annex I for further analysis). The impact of reducing the tariff rate is therefore significant, with a six fold increase in the total cumulative cost to 2020 under the do nothing scenario. The average cost per household associated with the FIT in 2020 is around 55 higher under this scenario. Figure 1. Total cumulative cost in billion of environmental and social levies to taxpayers and domestic energy customers from 1990 to Nuclear (taxpayers) Warm Front Coal Aid Nuclear (bill payers) Energy Efficiency Programmes Renewables (NFFO and the RO) 4.56 EU ETS & CPF Taxpayer spend Total = Billion Bill payer spend Total = Billion Centre for Sustainable Energy and the Association for Conservation of Energy 3

5 Figure 2. Projected total cumulative cost in billion of environmental and social levies to taxpayers and domestic energy customers from 2011 to 2020 (under DECC s Option A scenario for FIT) Nuclear (taxpayers) Warm Front RHPP Energy Efficiency Programmes Warm Homes Discount Renewables (NFFO and the RO) 7.02 EU ETS & CPF FIT 'Option A' EMR Smart Meters Taxpayer spend Total = 4.24 Billion Bill payer spend Total = Billion However, this does not allow for the benefits of this policy experienced by those taking up the FIT (by way of reduced energy demand and payment from the tariff). In this instance, the average energy bill (across all customers) is around 51 lower under the do nothing scenario (that is, assuming the energy payment is taken as net from their energy bill), suggesting an overall positive impact on consumer energy costs. However, the costs of FIT will be recouped from both domestic and non domestic customers. The do nothing scenario results in the non domestic sector contributing an additional 3.9 billion to the policy in This equates to an approximate cost to Small and Medium Enterprises (SMEs) of an additional 186,000 per year, which means policy costs would represent 30 per cent of their total energy bill in For larger, energy intensive businesses, the additional cost of the do nothing scenario ranges from 678,000 to 2.7 million. This increases the proportion of their bill attributed to policies to 37 per cent from 25 per cent (as opposed to 16 per cent from 10 per cent). Non domestic sector electricity consumers would not benefit from the deployment of domestic PV systems and, as such, would be subsidising the deployment of this technology. The costs of FIT at the non adjusted tariff rate would therefore not only jeopardise the HM Treasury Levy Control Framework, but would also place an undue burden on non domestic energy customers. Whilst this paper does not seek to perform a cost benefit analysis from a carbon or householder perspective (that is, the relative merits of a policy in terms of per tonne of carbon saved or the average change in a householder s bill), taking this high level view of policy costs compared to benefits delivered shows that the two main policies that aim to significantly reduce householders demand for energy (via insulation or more efficient heating, that is, the supplier led energy efficiency programmes and Warm Front) receive considerably less financial support than those committed to renewable energy or nuclear power. Centre for Sustainable Energy and the Association for Conservation of Energy 4

6 1. Introduction The use of policy to deliver specific objectives within the energy sector has been commonplace for decades, from a requirement to buy British coal in the 1970s and 1980s, through the Non Fossil Fuel Obligation (NFFO), 5 introduced in 1989, to the current mix of implicit and explicit support for renewables, energy efficiency and fuel poverty alleviation. However, though the practice of policy support and the recovery of resulting costs through consumer energy bills is not a new one, the level of policy support and associated costs to consumers has grown significantly. For example, the UK s first energy efficiency programme, the Energy Efficiency Standards of Performance (EESOP), which ran from 1994 to 2002, cost just 1 per customer each year, whilst the Carbon Emission Reduction Target (CERT) alone now costs consumers around 24 annually, levied separately on gas and electricity bills. Climate change and energy policies currently cost UK energy consumers approximately 3.2 billion per year in total. 6 Increases in household fuel bills over recent years have put a spotlight on the amount that households are paying towards energy and climate change policy. This increasing trend in fuel prices has caused fuel poverty to rise significantly, with the 2009 English Housing Survey (EHS) showing a total number of fuel poor households of 4 million. 7 These pressures have brought energy and climate change policy into conflict with the Government s requirement to alleviate fuel poverty; under the terms of the Warm Homes Act, no household should be in fuel poverty as far as reasonably practical by Media reaction to rising energy bills has often been inaccurate, 8 exaggerating current consumer costs, wrongly attributing high fossil fuel price scenarios to policies, and painting a doomsday scenario for the years to come. The Government has reacted. HM Treasury has placed a cap on the policy costs that the Department for Energy and Climate Change (DECC) can levy on bills. And, more recently as a result of this cap the Government announced a reduction in the level of solar subsidy through the feed in tariff (FIT) from 43.3p to 21p/kWh, with further cuts to the rate at six month intervals. 2. Scope of this paper This short study seeks to quantify the costs of historic energy and climate change policies from 1990 to 2010, modelled costs between 2010 and 2020, and examine how the burden has shifted between taxation and energy bills (all costs are shown in 2010 prices). The study is looking to answer the following questions: What is the historic burden of environmental and social policies, and to what extent have these costs been recovered through consumer energy bills? Which policies have had the greatest impact on the price households pay for energy? What additional impact would the FIT have had on consumer bills in the absence of the recent cut in FIT rate? The paper does not attempt to quantify the cost of energy efficiency delivered through product policies or regulations. It therefore excludes the extra costs of installing high efficiency boilers, higher building 5 Electricity Act 1989; 6 Centre for Sustainable Energy (CSE) Distributional Impacts Model for Policy Scenario Analysis (DIMPSA) EHS See Carbon Brief s challenge to the Daily Mail s recent coverage makes third correction to energy bills coverage Centre for Sustainable Energy and the Association for Conservation of Energy 5

7 standards or removing high wattage tungsten filament light bulbs from the market. Of course, it is recognised that these also increase the cost to consumers and deliver overall lifetime savings through lower power use or fuel costs. The report does not perform a cost benefit analysis (CBA) of the individual policies from the householder or the economy s perspective. However, the Centre for Sustainable Energy s (CSE) Distributional Impacts Model for Policy Scenario Analysis (DIMPSA) has been used to assess the impacts of measuresbased polices on a consumer s energy demand, such as through the installation of insulation via CERT, or the generation of electricity from photovoltaics (PV) via the FIT. The paper includes an Annex, which looks at the burden of costs the FIT poses to consumers in more detail. The costs of the FIT will be estimated for both the proposed rate and the previous rate, exploring the impact on bills if the industry had been free to expand at a higher rate. 3. Environmental and social levies, energy and housing policy This study has identified the following policies, which have impacted on household energy use and emissions whilst raising finances from household energy bills or through taxation (see Table 1. Energy and climate change policies that impact on domestic energy bills and general taxation liabilities). Non domestic customers will also contribute to the Climate Change Levy (CCL) via their energy bills; it is assumed that domestic customers do not contribute to the cost of this policy. The majority of the social levies for technologies and policies covered in this report tend to remain fixed. Nuclear power is an exception, with the historical funding from 1990 to 2001 via our energy bills covering the deployment of the technology and the funding from 2004 to 2020 covering the costs of decommissioning. However, the funding itself relates to the same generating plant but has a different role and purpose. As such, where possible, a clear distinction is made between the use of taxation or energy bills to support nuclear power. The policies that impact on consumers bills are charged in two ways, either per household or per unit. The decision to charge is driven by the nature of the policies themselves. The CERT policy provides measures to households and as such is levied on a per household (supplier account) basis. By comparison, a policy such as the Renewables Obligation is charged per unit of electricity sold. This is because the policy is based on support for technologies that generate a certain number of units of energy, such as defining the amount of revenue they raise through Renewable Obligation Certificates (ROCs). Centre for Sustainable Energy and the Association for Conservation of Energy 6

8 Table 1. Energy and climate change policies that impact on domestic energy bills and general taxation liabilities Policy Timeframe Fuels covered Purpose Taxation Nuclear decommissioning 2001 onwards n/a Support costs of nuclear decommissioning Warm Front 2001 to 2012 Primarily heating for low income households Renewable Heat Premium Payment 2011 to 2012 Support for renewable heat (vouchers) Coal aid 1997 to 2010 Support for coal generators CLG Decent Homes 2001 to 2010 A government programme to increase efficiency standards of social housing Energy bills as a fee per household NFFO (primarily supporting nuclear generation) 1999 to Electricity Support nuclear generation Energy Efficiency Standards of Performance 1994 to 2002 Electricity/ (Gas 2000/02) Support the installation of insulation Energy Efficiency Commitment to 2005 Electricity/Gas Energy Efficiency Commitment to 2008 Electricity/Gas Support the installation of insulation (mainly lofts and cavities) Carbon Emissions Reduction Target 2009 to present Electricity/Gas Community Energy Saving Programme 2010 to present Electricity/Gas Support the installation of a range of measures in areas of deprivation Energy Company Obligation and Green Deal 2013 to 2022 Electricity/Gas Support the installation of a range of insulation (including solid wall) and heating Warm Homes Discount 2011 to Electricity/Gas Money off vulnerable households bills Energy bills as a fee per unit consumed Renewables Obligation 2002 onwards Electricity Supporting large scale renewables EU ETS (Emissions Trading System) 2005 onwards Electricity Supporting emissions reduction for the largest emitters Carbon price floor 2013 onwards Electricity Ensuring the EU ETS operates effectively Small scale renewable FITs 2010 onwards Electricity Supporting small and medium renewables Smart meters 2012 to 2021 Electricity/Gas Improving information on supply and consumer feedback FIT CfD Contract for Difference 2014 onwards Electricity Supporting low carbon generation through price guarantee 9 NFFO contracts are ongoing with some generators being paid until Subject to approval for future funding in the next comprehensive spending review Centre for Sustainable Energy and the Association for Conservation of Energy 7

9 4. Approach to estimating the cost of social levies covered 4.1 Energy bill impacts The modelling of price impact on consumers energy bills for policies operating between 2010 and 2020 has been undertaken as part of a sister project for Consumer Focus ( Impact on consumer bills of energy policy, Association for Conservation of Energy (ACE) and CSE, 2012). For the purposes of this study, we have taken the policy inputs for the central policy scenario from this other project, which uses the low policy cost, central fuel price scenario. The sources for the additional inputs required for this study are summarised below. Feed in Tariff (FIT) This study has deployed two separate FIT scenarios to determine the impact on consumers bills. For the current scenario of FIT impacts, the team opted to deploy DECC s Option A, which targets average rates of return of around 5 per cent to 8 per cent, with around 5 per cent for domestic installations. This produces a tariff of 13.6p for 4kW installations, to give a return on investment (ROI) ranging from 0.5 per cent to 10 per cent. The do nothing scenario assumes that the original plans for tariff rates and degression 11 are deployed. However, it is important to note that the FIT impact assessments do not provide data on the actual number of assumed PV installations per year, their size and the typical profile of householders taking up measures. Cumulative installations to date are taken from DECC s website (follow the link and open the weekly cumulative tables 12 ). The following reports have been used to help quantify these two scenarios: Energy and Climate Change and Environmental Audit Committee s response from DECC on the impact of the FIT on consumers bills. This provides an explanation of the methodology needed to back calculate the assumed cost and per unit pass through to consumers from the figures presented in /MWh for each year 13 DECC recently published an updated impact assessment, 14 to accompany the Comprehensive Review Phase 1: Consultation on FITs for solar PV. It uses the estimated cost to consumers, the revised tariff rates and the estimated total numbers of measures to 2020 to predict yearly installation rates See Annex II for a more detailed breakdown of the numbers of installations. Energy Efficiency Standards of Performance (EESOP) and the Energy Efficiency Commitment (EEC) The cost of delivering EESOP 1 ( ) & 2 ( ) is 1/household, EESOP 3 ( ) cost 2.40/household. EEC 1 was taken from the Oxera report to Defra, 15 with the costs for EEC 1 estimated at 4 per household and 9 for EEC The degression rate represents the amount the tariff will reduce by each year for new entrants. The rate is designed to allow for reductions in cost associated with supply chain development DECC, Comprehensive Review Phase 2a Consultation on FITs for solar PV, IA No: DECC Oxera, Policies for energy efficiency in the UK household sector, Defra For further information, a better report can be found at EESOP_report_July03.pdf. Centre for Sustainable Energy and the Association for Conservation of Energy 8

10 Carbon Emissions Reduction Target (CERT), Energy Company Obligation (ECO) and the Green Deal (GD) As discussed above the costs associated with the policies delivered between 2010 and 2020 are detailed in the sister project. Renewables Obligation (RO) prior to 2010 The team s review of the Office of Gas and Electricity Markets (Ofgem) Annual Reports, 17 to generate costs from 2002/03 to 2010/11, provides an indication of the obligation level in ROCs and the buyout price. It is then possible to derive the nominal Renewables Obligation subsidy by multiplying the level of obligation by the buyout price. The Renewables Obligation subsidy can then be divided by the total electricity supplied in the year in question to determine the cost to be passed on to consumers as a in pence per kwh. EU Emissions Trading System (ETS) prior to 2010 The cost of the EU ETS to energy consumers can be determined from the average yearly price per tonne of CO 2 in Euros, the carbon intensity of UK electricity 18 and the exchange rate from Euros to pounds. The first phase of the EU ETS, which ran from 2005 to 2007, saw an over allocation of permits to pollute and led to a collapse in the price of carbon from 33 to just 0.20 per tonne, meaning that the system had little impact on emissions. The value of EU ETS permits fluctuates throughout the year and, as such, the average price is hard to determine. For example, the price of allowances increased more or less steadily to a peak level in April 2006 to about per tonne CO 2 but fell in May 2006 to under 10 per tonne. This was a result of reports that several countries had given their industries generous emission caps that undermined the need to reduce emissions. Lack of scarcity under the first phase of the scheme continued through 2006, resulting in a trading price of 1.2 a tonne in March 2007, declining to 0.10 in September The carbon price within Phase II increased to over 20/tCO 2 in the first half of The average price was 22/tCO 2 in the second half of 2008, and 13/tCO 2 in the first half of Table 2. Assumed yearly average costs of EU ETS permits ( per tonne CO 2 ) shows the assumed cost of CO 2 in Euros per tonne over the years. Table 2. Assumed yearly average costs of EU ETS permits ( per tonne CO 2 ) Average price Year Euros per tco We assume that, despite most of the emissions permits being distributed free of charge to generators, that the opportunity cost of these permits was passed on to energy consumers. Ofgem told the House of Commons Business and Enterprise Committee in 2007/8 that utilising this opportunity cost would create a 9 billion windfall to the UK electricity generating sector over the lifetime of Phase 2, from 2008 to HoC Business and Enterprise Committee (2008) Energy prices, fuel poverty and Ofgem 19 Analyse van de CO2 markt (in Dutch). Emissierechten. November Committee on Climate Change, Meeting Carbon Budgets the need for a step change. Progress report to Parliament Committee on Climate Change, 2009 Centre for Sustainable Energy and the Association for Conservation of Energy 9

11 Non Fossil Fuels Obligation (NFFO) The NFFO was the first UK policy to support low carbon electricity generation. NFFO represented a collection of orders requiring the electricity suppliers in England and Wales to purchase electricity from the nuclear power and renewable energy sectors up to certain levels. Similar mechanisms operated in Scotland and Northern Ireland. The NFFO was put in place by the powers of the Electricity Act 1989, under which electricity generation in the UK was privatised. The original intention was to provide financial support to the UK nuclear power generators, which continued to be state owned, to cover their liabilities for nuclear waste management and decommissioning. The proposals were enlarged in scope before the Obligation was brought into operation in 1990 to include the renewable energy sector. Several contracts from the last rounds remain in place, with the generators receiving the agreed amount from the Non Fossil Purchasing Agency (NFPA) 21 and the NFPA taking ownership of the ROC, which the generator is entitled to. The costs associated with the NFFO from 1990 to 1996 split by sector (renewable or nuclear) were published in a report to the Council for the Protection of Rural England. 22 There are several generators that are still operating under NFFO contracts and will receive payments until For the purpose of this study, the team contacted the NFPA for further information on the costs of NFFO from 1990 to Unfortunately, the NFPA indicated that their records were predominantly in paper format and, as such, quantifying the cost of the policy would have been too arduous. 4.2 Impact on taxation The costs to taxpayers of a number of additional policies relating to electricity generation and energy efficiency have been quantified here. 23 Whilst these policies do not impact on our energy bills, we are paying for them via general taxation. Therefore, any assessment of the burden of environmental and social levies on householders should include these policies. It is also important to acknowledge that both people and businesses contribute towards the funds raised by general taxation. The Government does not earmark the use of particular types of taxation for individual services or policies ( hypothecation ). The determination of the share of general taxation that could be apportioned to the public (nominally householders) is difficult to calculate. The Institute of Fiscal Studies 2011 briefing note A Survey of the UK Tax System shows that income tax and national insurance contributions account for 49.6 per cent of total receipts. 24 If you make an allowance for the employee and employer contribution to national insurance, 25 this percentage falls to 34.8 per cent. The next largest single contribution to public finances is Value Added Tax (VAT), which contributes approximately 17 per cent. The split between the amount of VAT paid by households and business is unclear as the data supplied by HMRC is reported by industrial Standard Industrial Classification code of the contributor rather than the payee. However, the majority of VAT is paid by householders, with a small contribution from non VAT registered businesses with turnovers of less than 50,000. Indirect taxes 21 The NFPA was set up in 1990 by the 12 RECs as their agent for the purpose of enabling them to enter into collective arrangements to discharge their obligations under the Orders 22 Catherine Mitchell, Renewable Energy in the UK: Policies for the Future (London: Council for the Protection of Rural England, 1998) 23 We do not include taxpayer funded income transfers like cold weather payments, winter fuel payments and predecessor schemes, or emergency grants paid by local authorities for appliances or heating 24 See page 4, 25 Based on employees paying 12 per cent to national insurance contributions and business 13.8 per cent Centre for Sustainable Energy and the Association for Conservation of Energy 10

12 make up a further 11 per cent of public finances, with the majority a result of householders expenditure on road transport fuels, tobacco and alcohol. Unfortunately, the contribution of householders and business to VAT and other indirect taxes is unclear. The collection of VAT and indirect taxes is also regressive when compared to the collection of income tax and National Insurance. For the purposes of this project, the team has therefore assigned 34.8 per cent of the costs of policies supported by taxation to householders. The cost per householder is then calculated by dividing this cost by the total number of households. The sources for the additional inputs required for this study are summarised below. Nuclear decommissioning and the protection agency The costs of supporting nuclear generation and decommissioning shifted from energy bills to general taxation in 2001 when the Renewables Obligation was introduced to replace NFFO. The costs associated with nuclear power can be split into two main aspects: BNFL/Magnox decommissioning and managing nuclear liabilities. The following annual reports were reviewed to determine the costs associated with these: 2003 DTI Annual Report 2004 DTI Annual Report 2005 DTI Annual Report 2006 DTI Annual Report DTI Annual Report and Accounts BERR Annual Report DECC Resource Accounts The future costs of nuclear decommissioning are taken from the Office of Budgetary Responsibility (OBR) forecasts for future public expenditure. 26 The future costs of decommissioning represent additional funds from the taxpayer rather than a previously developed escrow 27 type fund. However, it is difficult to follow the flows of funds over time as the responsibility for different aspects of managing our nuclear liabilities has shifted between various organisations over time. The Nuclear Decommissioning Authority will receive the majority of this funding as part of the Lifetime Plan for designated sites. The figures are based on the latest available technical assessments of the processes and methods likely to be used in the future to manage our facilities. However, as recognised by the Whole of Government Accounts (WGA), these are the best possible estimates from the available information. There remains a significant degree of inherent uncertainty in the future cost estimates. This uncertainty has led the Comptroller and Auditor General to include an Emphasis of Matter statement in their Audit Opinion on the Nuclear Decommissioning Authority s accounts. 28 Renewable Heat Premium Payment The costs associated with the Renewable Heat Premium Payment are taken from the latest Energy Saving Trust (EST) figures on installed measures and payments for The scheme has been continued in 2012 and, as such, the costs have been duplicated for the second year. 26 Table 2.3: Provisions in WGA for , Charts and tables from the Fiscal sustainability report July An escrow fund is an arrangement, whereby an independent trusted third party receives and disburses money for the transacting parties 28 HMT, Whole of Government Accounts: Year ended 31 March 2010, HC 1601 Centre for Sustainable Energy and the Association for Conservation of Energy 11

13 Warm Front The costs associated with Warm Front have been collated by ACE over the last 5 years. The main sources for the costs are answers to Prime Minister s Questions (PMQs) and Eaga Plc s (now Carillion Energy Services) annual reports. The Decent Homes Programme The Decent Homes Standard was reviewed in a detailed report by the National Audit Office in The Decent Homes Programme was overseen by the Department for Communities and Local Government (DCLG). It aimed to improve the condition of homes for social housing tenants and vulnerable households in private sector accommodation in England. DCLG set a decency standard to which all social rented homes should be improved and, in some cases, allocated funding to enable that improvement. The programme aimed to improve these homes to the identified decency standard by 2010, which included the following thermal comfort criteria: The property must have efficient heating (A rated gas/oil/lpg or solid fuel programmable central heating system or electric storage heaters) The property must have effective insulation (for properties with gas or oil programmable central heating a minimum of 50mm loft insulation; for other heating system types, a minimum of 200mm loft insulation) DCLG did not attempt to calculate an estimate of the total cost to local authorities and Registered Social Landlords of meeting the Decent Home Standard on social housing stock up to It did, however, assess the scale of the challenge for local authority owned stock, estimating that the total cost of improving such stock would be 19 billion. This estimate did not include the cost of improving homes that fell into non decency during the programme or the cost of inflation. The total cost of delivering the Decent Homes Standard is difficult to quantify as social housing providers only report the total investment rather than the sources of funding. Social housing providers typically used a range of funders to deliver their Decent Homes targets. The National Audit Office report does provide an indication of the funding provided in figures 8, 10 and 11 (covering total investment, department funding and the regional housing allocation). Based on the report s estimate of 65 to 69 per cent of the Major Repairs Allowance and the Regional Housing Pot being spent on Decent Homes, it is possible to determine a total expenditure on the programme. However, the costs associated with the thermal comfort criteria are unclear, with much of this work likely to be funded from other sources, such as Warm Front and supplier funded programmes (EEC and CERT). The results in this report therefore exclude the Decent Homes Programme. Coal aid The costs associated with Coal Authority and Coal Investment Aid were collated from the Coal Authority s Annual Reports and summary tables from DECC s website. 30 Funds were provided to help potentially viable mines overcome short term market problems and maintain access to viable reserves at 12 deep mines. 29 National Audit Office Report (HC ): The Decent Homes Standard, Centre for Sustainable Energy and the Association for Conservation of Energy 12

14 5. Historic trends for fuel prices The 1989 Electricity Act created a system of independent regulation, headed by the Director General of Electricity Supply (DGES) covering England, Scotland and Wales. The regulator s principal roles were to ensure that competition develops smoothly and effectively and to protect customers where competition is inappropriate. In 1999, the regulatory offices for electricity and gas (Offer and Ofgas) were merged to form Ofgem. The deregulation of the UK s energy market began in the late 1980s, when the Government privatised British Gas through the sale of shares. In 1990, the Government privatised the UK electricity supply industry by separating generation from distribution. In England, transmission was owned by the distribution companies. However, full separation of distribution from supply was not enabled until Residential markets were initially subject to price caps immediately after privatisation, and choice was gradually introduced. In the electricity market, choice for householders was planned as part of the privatisation legislation and was completed in Initially, privatisation of the gas market granted the incumbent supplier an indefinite monopoly for the household market. However, this was changed by legislation in 1994, and all consumers had a choice of energy supplier by As consumers started to switch supplier, regulation was gradually withdrawn, and the final markets were fully deregulated in April At the same time, reform of the wholesale electricity markets in 2000 replaced a spot market system, whereby suppliers were paid the marginal price, with one based on bilateral contracts, where generators were paid the price that they bid. Figure 3. Fuel poverty in England and the RPI for gas and electricity from 1996 to ,000, ,000,000 Fuel RPI relative to GDP ,000,000 3,000,000 2,000, ,000, Fuel poverty in England Electricity RPI Gas RPI Figure 3. Fuel poverty in England and the RPI for gas and electricity from 1996 to 2011 shows the trends in fuel poverty and the RPI for electricity and gas from 1996 to The deregulation of the Centre for Sustainable Energy and the Association for Conservation of Energy 13

15 energy market and expansion of consumer choice was designed to increase competition and drive down energy prices. Fuel prices initially fell, with electricity bills decreasing between 1998 and 2004 and gas bills falling slightly over the same period. 31 This is shown in Table 3. Average dual fuel bill and Economy 7 electricity bill by year (DECC UK averages in real terms deflated to 2005), which tracks the change in the average UK energy bill between 1990 and 2011 (see annex II for gas and standard electricity bills). 32 This decline in energy cost and increased rates of uptake for energy efficiency measures led to fuel poverty falling from a high of 4.3 million in 1996 to 1.2 million in In subsequent years, energy prices have risen significantly, resulting in a high point for fuel poverty of 5.2 million in Table 3. Average dual fuel bill and Economy 7 electricity bill by year (DECC UK averages in real terms deflated to 2005) Total dual fuel bill Electricity Economy 7 bill Year Standard credit Direct debit Pre payment meter Standard credit Direct debit Pre payment meter , , , , , The energy market is now dominated by six large energy suppliers, which supply energy to 99 per cent of customers. The tariff differential between standard credit and direct debit stands at approximately 50 in Furthermore, despite efforts from Ofgem, pre payment meters remain a significantly more expensive way of purchasing energy. The tariff differential between those customers that switch supplier 31 See Figure 2.10 in the DECC Hills Review Interim Report, 32 Average bills for electricity taken from DECC Table 2.2.1, average bills for gas taken from DECC Table with the electricity cost prior to 1995 and the gas cost prior to 1998 calculated by applying the Fuel RPI (DECC Table 2.1.1) to the earliest cost ( 33 Consumer Focus, Nowcast, CSE 2011 Centre for Sustainable Energy and the Association for Conservation of Energy 14

16 and those that use their former home supplier is approximately 30 for standard credit electricity. 34 The maximum range in electricity tariffs for a customer on a pre payment meter with the home supplier compared to direct debit with a non incumbent supplier is 65, based on DECC s figures (although in practice, price comparison websites and programmes to support switching suppliers typically quote maximum savings in excess of 200). Householders that have switched once or remain with the home supplier are often referred to as sticky customers as they do not engage in the energy market. The continuing size of tariff differentials and the significant number of sticky customers is symptomatic of a lack of competition in the market. Ofgem found that only 15 per cent of households switched gas supplier last year and 17 per cent for electricity, down from 20 per cent and 19 per cent in The Climate Change Committee report on household energy bills examines the key drivers for changes in energy bills since The report found that the average dual fuel energy bill for typical household had increased from around 605 in 2004 to 1,060 in The key driver for the 455 increase was found to be increases in the wholesale price of gas, which added around 290 to bills. The burden of energy policy costs was found to result in an additional cost of 75, which covered 30 to support investments in lowcarbon power generation and 45 for the funding of energy efficiency improvements in homes. The remaining increase of 90 was attributed to increasing transmission and distribution costs and VAT. The average cost of climate change policies to consumers in 2010 is therefore comparable to the maximum differential in energy tariffs from DECC s average UK energy bills tables, that is, 75 vs Based on an average bill of 418 for a householder on standard credit with the home supplier and 390 for those with a non incumbent. The maximum range is the difference between pre payment with the home supplier and direct debit with a non incumbent Centre for Sustainable Energy and the Association for Conservation of Energy 15

17 6. The cost of environmental and social levies The cost of environmental and social levies to householders from 1990 to 2010 is derived from historical reports on policies, DECC data for consumption and supply, and CLG data on numbers of households (see section 4). The costs from 2011 to 2020 are derived from the central policy scenario in the sister report for Consumer Focus on the Impact on consumer bills of energy policy (ACE and CSE, 2012). 6.1 The historical cost Figure 4. Total cost of environmental and social levies between 1990 and 2010 on a per household basis including nuclear (covering Great Britain) shows the amount typical households contributed to environmental and social policies between 1990 and 2010 (see Annex Table 10. Average policy costs experienced by householders (energy bill impacts are based on average dual fuel consumption), 1990 to 2000 for a detailed breakdown of costs by year). The dashed lines indicate that the policy is supported by taxation. Figure 5. Total cost of environmental and social levies between 1990 and 2010 on a per household basis excluding nuclear (covering Great Britain) shows the costs without nuclear to allow the chart to use a smaller scale and, as such, show the trend for the lower cost policies. The policies that impact on general taxation are split across every UK household based on the contribution that National Insurance (employee aspect only) and income taxation make to the revenue raised from public finance (see section 6.2 for more detail). The costs of energy bills are based on an average dual fuel customer, that is, a customer using gas for heating. Figure 4. Total cost of environmental and social levies between 1990 and 2010 on a per household basis including nuclear (covering Great Britain) 120 Warm Front EESOP, EEC, CERT, ECO & GD Total cost of environmental policies per household CESP Renewables element of NFFO and the RO EU ETS and CPF FIT 'Option A' Nuclear element of NFFO and nuclear decommissioning The costs of supporting policies via energy bills remained relatively constant at approximately 45 to 50 for NFFO between 1990 and In 2001, the costs of supporting nuclear power and decommissioning were then moved to the public finances via taxation. The amount contributed to policies via energy bills Centre for Sustainable Energy and the Association for Conservation of Energy 16

18 then fell to a low of an average of 1 per year for EESOP in The scale of levies passed on to consumers via their energy bills steadily rose to 67 in 2010, representing 0.2 per cent and 7.1 per cent of a dual fuel customer s bill respectively (see Figure 7. Average dual fuel energy bill and the proportion spent on energy policies and Annex Table 10. Average policy costs experienced by householders (energy bill impacts are based on average dual fuel consumption), 1990 to 2000 and 11). In 2010, there were three key policies responsible for the majority of the costs passed on to consumers: CERT (29 per cent), the Renewables Obligation (28 per cent) and the EU ETS (32 per cent). The highest policy cost to householders between 2001 and 2010 can be attributed to nuclear power (with the exception of 2004 and 2008, when the costs of decommissioning were lower than the typical value), an average of 1.4 billion per year between 1990 and The costs of supporting nuclear power reached a peak in 2007, at 96 per household, which equates to a total cost of 2.5 billion ( 7.1 billion across all taxpayers and sources). These costs have now fallen and are expected to stabilise at approximately 0.4 billion ( 1.2 billion across all taxpayers and sources) per year going forward, based on the average investment required in the timeframe identified by the OBR. Figure 5. Total cost of environmental and social levies between 1990 and 2010 on a per household basis excluding nuclear (covering Great Britain) 35 Total cost of environmental policies per household Warm Front EESOP, EEC, CERT, ECO & GD CESP Renewables element of NFFO and the RO EU ETS and CPF FIT 'Option A' Coal aid The future cost Figure 6. Total cost of environmental and social levies between 2011 and 2020 on a per household basis shows the cost of environmental and social levies projected to The cost of supporting the renewable obligation becomes the largest single cost to householders, requiring per household in 2011 and in 2020 (see Annex Table 12. Average policy costs experienced by householders 35 Decent Homes is not included as it is not possible to identify the proportion of spend on energy efficiency covered by social housing providers, that is, not supplier funded Centre for Sustainable Energy and the Association for Conservation of Energy 17

19 (energy bill impacts are based on average dual fuel consumption), 2011 to 2020for further detail). The EU ETS projects a similar scale of increase from to The cost of supporting energy efficiency measures via CERT, and then the ECO and Green Deal, remains relatively constant at an average of per household. The EMR adds a further cost to householders electricity bills from 2014, as low carbon generators will receive price support if the wholesale price does not reach a guaranteed level. Centre for Sustainable Energy and the Association for Conservation of Energy 18

20 Figure 6. Total cost of environmental and social levies between 2011 and 2020 on a per household basis 40 Nuclear element of NFFO and nuclear decommissioning Warm Front 35 Coal aid Total cost of environmental policies per household EESOP, EEC, CERT, ECO & GD CESP WHD Renewables element of NFFO and the RO EU ETS and CPF FIT 'Option A' EMR Smart Meters RHPP Figure 7. Average dual fuel energy bill and the proportion spent on energy policies shows the average UK dual fuel bill from 1990 to 2020 (left axis) and the proportion of this bill that contributes to policy costs (right axis). The proportion committed continues to rises from 5.7 per cent in 2011 to 10.8 per cent in However, as demonstrated in the sister report Impact of energy policy on consumer bills, 31 per cent of the unit costs of electricity (57 per cent for gas) in 2020 are related to wholesale costs. Further to this, in 2020, transmission and distribution costs are responsible for 22 per cent of the unit cost of electricity and 24 per cent for gas. In other words, the predominant driver for the future prices of energy supply is the wholesale and distribution costs associated with fuel. Centre for Sustainable Energy and the Association for Conservation of Energy 19